Beware – IRS Staking ‘Victory’ Does Not Constitute Law Change

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  • The case involving a pair of Tezos stakers has made headlines this week, but it has been taken out of context
  • The Josh and Jessica Jarrett received an offer of a tax refund from the IRS over unclaimed XTZ tokens
  • The settlement was refused and in no way marks a legal precedent

The news that a pair of Tezos stakers have won a battle against the Inland Revenue Service (IRS) over the classification of staking rewards has rightly been met with joy in crypto circles, but there has been some confusion over the meaning of the ‘victory’. Certain outlets made it seem like the pair had won a legal battle which would in turn set a precedent for crypto stakers everywhere, but this couldn’t be further from the truth – a truth that could prove costly if ignored.

Josh Jarrett Argued that New Coins Shouldn’t be Taxed

Josh and Jessica Jarrett made headlines earlier this week when they were reported to have won a legal victory against the IRS over the taxation of unclaimed XTZ coins earned through staking. The Jerrett’s position was that “newly created property is not income”, comparing receiving staking rewards to a baker baking a cake. This theory is opposed to the IRS’s current rules.

Last month the IRS relented and agreed to refund the Jarretts the $3,793 they paid in tax related to the staking rewards, plus interest, with Josh Jarrett stating that the reward showed that “the government didn’t want to defend the position that the tokens I created through staking were taxable income”:

IRS Rules Have NOT Changed

Several media outlets picked up on the story and blew it up to be not just a legal victory but also one that set a precedent for all cryptocurrency stakers going forward. This is not the case however, and it is important to know why:

  • The refund was a settlement offer from the IRS, not the result of a legal defeat
  • The settlement offer was not accepted
  • The settlement offer does not constitute any kind of precedent and does not apply to anyone else other than the Jarretts

Josh Jarrett stated on Twitter that he rejected the IRS refund offer because “until my case receives an official ruling, I have no certainty they won’t try to tax me again.” This is key – until an official ruling is made on the case it remains an individual instance and has no precedent attached to it. Only a legal defeat for the IRS could be termed a precedent, and even then unless it leads to a rule change it can only be used in mitigation as part of a defense strategy.

The upshot of all this is that you should follow existing IRS guidelines and pay taxes relating to them until the IRS says otherwise.